Fed stance on rates pulls stocks down

By Joe Bel Bruno
Associated Press

NEW YORK » Wall Street plunged yesterday, pulling the Dow Jones industrial average down more than 360 points as investors found themselves confronted by two uncomfortable prospects: an end to interest rate cuts and a slowing economy.

Mindful of a warning from the Federal Reserve Wednesday about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking.

The Fed, which cut interest rates a quarter point, said in a statement that inflation remained a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates.

Meanwhile, Wall Street also had to contend with concerns about a slowing economy. A U.S. Commerce Department report indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.

The combination of factors led investors to pull back sharply from yesterday's rally, in which the Dow climbed 137 points after the Fed said the economy had weathered the summer's credit crisis.

"Wall Street is in love with the idea of a rate cut, and realized that the Fed said inflation is still a concern -- that lowered the chances of a cut in December," said Ryan Detrick, a senior technical strategist with Schaeffer's Investment Research. "We're now feeling the pain now that investors have slept on it, and figured out what they said."

Investors were unswayed when the Fed pumped $41 billion into the U.S. financial system, one of its largest cash infusions since the credit crisis began in the summer. This increases the amount of money banks have to lend, and helps improve liquidity. In the past, such an action helped soothe the market, but that was not the case yesterday.

With the market growing pessimistic about the economy, the U.S. Labor Department's report on October jobs creation, to be released today, will be taking on even more importance than it usually has. The data is expected to show unemployment remained steady in October, with payroll growth of 85,000 new jobs, compared with 110,000 in September.

The Dow fell 362.14, or 2.60 percent, to 13,567.87. The Standard & Poor's 500 index was off 40.94, or 2.64 percent, at 1,508.44, while the Nasdaq composite index dropped 64.29, or 2.25 percent, to 2,794.83. The Russell 2000 index of smaller companies was down 32.84, or 3.97 percent, at 795.18.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 970.8 million shares.

Investors pulling money out of stocks turned to the safe haven of the Treasury market. The yield on the 10-year Treasury note dropped to 4.34 percent from 4.47 percent late Wednesday.

Crude prices vaulted above $96 per barrel in overnight trading. A barrel of light sweet crude settled down $1.04 at $93.49 on the New York Mercantile Exchange.